By Kevin Kulling, J.D.
A complaint brought against CTPartners, a Wall Street executive recruiting firm, alleging that the company was liable for fraudulently touting its culture for honesty and integrity in filings and press releases while failing to disclose that it fostered a discriminatory and hostile work environment for women has been dismissed by a federal court for failing to state a claim. The class action was ignited by tabloid stories involving allegations surrounding the company’s treatment of women including at parties at the Florida home of the former CEO (Lopez v. CTPartners Executive Search, Inc., March 29, 2016, Engelmayer, P.).
Origin of allegations. Shareholders who brought the class action against CTPartners alleged that there was a “precipitous decline” of the company’s stock price in the aftermath of a New York Post story that recounted allegations of discrimination by top executives. The article, titled “Wall Street Recruiters Had Boozy Naked Romps: Complaint” described an EEOC complaint that detailed a party held at former CEO Brian Sullivan’s home in which, in the presence of various partners, “Sullivan and at least three other top executives shed their clothes, formed a rugby-like scrum and ran into the ocean.”
The Post article reported that the EEOC complaint described the company as a “boys club” where women were repeatedly stripped of profitable accounts that were then handed to male employees. The complaint alleged that women were held to a higher standard for performance and were let go even if they brought in more money than male counterparts. The company’s New York office received more than a dozen different internal sexual-harassment complaints in 2012, according to the article.
Securities fraud complaint. Shareholders claimed that revelations contained in the Post article exposed as false and misleading various statements CTPartners had long made touting its culture for honesty and integrity in SEC filings, press releases, on earnings calls or at public events. Those statements included that the culture was “strong” and “performance based.” The company also made statements regarding its voluntary turnover rate, which Sullivan had claimed was the lowest in the industry partly due to the company’s compensation structure, according to the complaint.
But the court said that statements identified by shareholders were “inherently immaterial puffery” and not actionable. Broad statements about a strong culture that is “results oriented” at a company “committed to transparency in the marketplace” consist of precisely the type of puffery that the Second and other circuits have consistently held to be inactionable, the court said.
Additionally, statements regarding the company’s transparent compensation structure were so broad and nebulous as to not provide any specific or concrete guarantee on which a reasonable investor could have relied, the court said. Similarly, statements that the company took discrimination allegations very seriously and that it was committed to promoting an “inclusive and positive” working environment were hazy and general, precluding a reasonable investor from relying upon them.
Claims of low voluntary turnover. Shareholders also challenged statements made by the company that it had a low voluntary turnover rate. The court, acknowledging that these statements were factual and not puffery, nonetheless held that the allegations did not permit a “non-speculative inference” as to the reasons for the departure of several female employees. The facts alleged were far too sparse to support a claim of discriminatory termination, the court said. In addition, the court zeroed in on the company’s reference to “voluntary” turnover rate, which would only cover elective departures by employees and not terminations, for whatever reason. Accordingly, the court held that statements by CTPartners regarding its low voluntary turnover rate were not false or misleading.
Item 303. The court also found unpersuasive the complaint’s attempt to establish liability for alleged omissions and statements under Item 303. While the complaint alleged that CTPartners was obligated under Item 303 to affirmatively disclose in its SEC filings the true nature of the company’s systemic hostility to women and its hostile work environment, the court, rejecting the argument, said such matters were outside the scope of Item 303. The court said the complaint had not adequately pleaded the existence of an uncertainty that was both presently known to management and reasonably likely to have material effects on the registrant’s financial conditions or results of operations.
Discriminatory or hostile actions did not pertain to the company’s operational results or financial condition, the court said, holding that the shareholders had not adequately pleaded that at any relevant time there was a known uncertainty, such as an allegation that the company knew a public revelation such as the Post article was forthcoming.
Earnings press release. The complaint also alleged that the company’s press release announcing preliminary earnings results for the fourth quarter of 2014 was fraudulent. The preliminary earnings report included positive guidance for the upcoming quarter. One week after announcing preliminary earnings results, the company withdrew its guidance for the first quarter and revised its preliminary earnings guidance for the fourth quarter of 2014. The company went from a projected EPS of $0.08 to $0.12, to a loss of $0.07 to $0.09. The company explained that the revision was due to an increase by $1.7 million in compensation expense for employee bonuses.
The court said that the complaint failed to state a claim based upon the preliminary earnings statement because the statements were not actionable in light of the “bespeaks caution” doctrine and the PSLRA’s related provision protecting forward looking statements. In addition, the amended complaint failed to adequately plead that the preliminary earnings results statement was false or misleading at the time it was made.

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